When running a business, it takes money to make money. You make spending decisions every day for the betterment of your company, and one of the most important decisions is people.
The cost of hiring an employee is arguably one of the most expensive parts of running a business. While that may seem scary, people are the key enabler to business growth and performance, so hiring new employees is a super-exciting process.
In this article, we’ll look at the true cost of hiring an employee. Once we’ve run through the common cost areas to think about, we’ll look at how to tie those costs together and optimize your total investment.
- 7 Most Common Hiring Cost Areas
- The Total Costs of Hiring an Employee
- How to Optimize Your Hiring Costs With Toggl Hire
7 Most Common Hiring Cost Areas
Here is a breakdown of some of the most common hiring costs across any industry. Each of these contributes to the overall cost to hire a new employee and all need to be considered in the round.
1. External Hiring Team/Recruitment Partner Costs
For many companies, having a dedicated HR team simply doesn’t make sense. Startups are booming across the world, and teams of half a dozen people can successfully run a business. If that’s you, there are two things to note:
- It’s not necessary to have a hiring expert in a team this small.
- With only several people on board, every new hire is crucial for the team’s success.
Most of all, small business owners spend around 40% of their working hours on tasks that do not generate income, so you don’t want to add to that with hiring.
Because of this, many companies enlist the help of outside recruitment support. There are numerous recruitment agencies happy to help you out in filling a position, but be aware – they don’t come cheap.
Small business owners spend around 40% of their working hours on tasks that do not generate income, such as hiring.(Video) 2022 Employment Law Update | 2022 New Labor Law Update
Most agencies work on a performance model where they are paid only when they hire the right candidate. The price for such a service? Anywhere between 15 to 25% of the employee’s annual salary, and maybe even additional bonuses for c-suite level talent.
Depending on the salary you have in mind for a new employee, this is how much you could be paying a recruitment agency:
|Employee Base Salary||15%||20%||25%|
2. Internal HR team
But, once your company gets big enough to warrant its own hiring processes, it may be time to get a dedicated HR person or team onboard. However, that too comes at a price.
At a minimum, you’ll have at least one HR manager on your team. Salaries differ across the board, but general estimates are anywhere from $91,000 to $120,000 per year.
The HR expert does everything from setting up the job ad, to putting it out on job boards (such as Jooble or Jobbatical), screening and sourcing the candidates, assessing and interviewing them, all the way to making an offer.
Of course, the HR manager and team have a lot more on their plate than just hiring, so working out their costs per hire is a bit trickier. Here’s how you can do it though:
- First, make sure you understand your HR Manager’s hourly salary. There are many tools Salary-to-hourly tools out there to help. For example – a $100,000 salary breaks down as around $385 per hour.
- From there, work out how many hours it will take for your HR Manager to hire a new employee. That includes everything from posting the job ad to completing an offer.
This isn’t a number you’ll know right away, but you’ll get an idea over time. Let’s use 20 hours as our example.
- 30 hours x $385 = $7,700 – that’s your internal HR team cost for that hire.
3. Job Boards Fees
If you’re doing your recruiting internally, you’ll need to start to consider the costs of getting your vacancy out there. Job Ads fees are one of the most common costs to think about, and vary wildly between which site you use.
For example, LinkedIn is one of the hottest places to look for a job. Up until a while ago, they had a fixed price plan of $495 for 30 days for one position. Last year, it was changed to a pay-per-click model. Currently, it will set you back $1.20 to $1.50 per click on your job ad, depending on the job title, location, and competition.
Here are some high-level costs from other popular job boards:
- Indeed – Set your budget and pay between $0.10 to $5 per click depending on the title, location, and competition.
- Monster – Monthly subscriptions from $249 per month for one job to$999 per month for five jobs.
- CareerBuilder – Monthly subscriptions per month from $219 to $599 depending on the number of roles.
- Dice – A single job posting for 30 days costs $395.
- Craigslist – $10-$75 for a 30-day posting
The key to remember with job boards is that you’re paying for exposure. Indeed, Monster & LinkedIn cost a lot because they have the highest number of daily users. We’d always recommend seeking out niche job board to optimize cost and target the right type of candidates for you.
4. Background Checks & Security Clearance
Once you’ve found someone you want to hire, it’s best practice to learn more about them before making an offer. This is why it’s useful to run background checks.
You can check for anything from verifying their education, previous employers, to criminal databases. For specific industries, such as Defence, you may also need to apply for security clearance which can cost thousands of dollars.
Security clearance aside, a standard background check can cost as little as $5 or as much as $80 depending on how detailed you want to go.
5. Onboarding and Training
What many people fail to factor in when they consider the Cost of Hiring an Employee is the money you need to spend onboarding and training them.
These costs include:
- Cost of IT equipment (Laptop, phone, software licenses)
- Cost of formal training (Courses)
- Cost of employee support (Time for other team members to support)
- Loss of productivity as new start gets up to speed
For the last point, as confirmed by research, it takes 8 to 26 weeks for an employee to achieve full productivity. During this time, organizations are often essentially losing money as the new employee costs more than they are earning for the company.
The more complex or senior the job, the longer it takes to get familiar. In other words, a new sales representative should start to pay for themselves sooner than a new senior manager.
While IT and training costs are fairly easy to quantify, only you will know how much support a new employee will need or how much their lack of productivity is costing.
6. Salary, Benefits & Bonus
Once an employee comes on board, you’ve got to start paying their wages. Depending on your structure, this will mean weekly or monthly wage salaries going forward into the future.
When calculating your ongoing cost to hire and then employee a new member of the team, make sure you consider the following cost aspects:
- Core salary
- Taxes (e.g. Social Security/National Insurance)
- Benefits (e.g. Pension)
- Bonuses (Both yearly performance and any signing bonus)
Let’s consider the United States, and a famous research study conducted by MIT. In an example where the basic salary of an employee was $50,000 per year, the employer’s costs are anywhere from 1.25 to 1.4 times higher than the base. In this specific case, for an employee to receive $50,000, the employer has to pay from $62,500 to $70,000 per year.
Long term, remember that most employees expect their salaries to rise over time, usually in line with your countries inflation.
7. Other Acquisition Channels
While most new employees come through job boards or external recruitment agencies, there are other ways to source new candidates for roles.
When calculating the cost of hiring an employee, remember to change your estimates based on your acquisition channel. Other common examples include:
- Attending/hosting career/industry events
- Your website’s career page
Each of these schemes may have an associated cost, which is especially easy to estimate for events or referrals. Fixed costs such as a website careers page should be factored across all of your hire. E.g if it costs $1000 a year to host your website page, and you plan to make 10 hires, that’s $100 per hire.
The Total Cost of Hiring an Employee
So with most of our common cost areas identified, it’s simply the case of adding all the ones which are relevant together to get a total cost.
Let’s run through an example, calculating the one-off costs of hiring an employee using an internal HR Manager:
- HR Manager 30 hours effort – $7,700
- 1-month job ad on Monster – $249
- Basic background check – $50
- IT equipment – $600
- Training courses – $400
- Employee support 20 hours effort – $6,000
- New employee signing bonus – $2,000
Total – $16, 999
This is just an example, albeit a very expensive one! But, it gives you a good flavor of the cost of hiring an employee in 2022.
There are many studies out there that have also looked into the cost of hiring an employee. Here are some high-level results:
- As stated in a study by the National Association of Colleges and Employers, hiring an employee in a company with 0-500 people costs an average of $7,645.
- Another study by the Society for Human Resource Management states that the average cost to hire an employee is $4,129, with around 42 days to fill a position.
- According to Glassdoor, the average company in the United States spends about $4,000 to hire a new employee, taking up to 52 days to fill a position.
How to Optimize Your Hiring Costs with Toggl Hire
What if we told you that you could optimize the cost of hiring an employee?
This is exactly what we’ve been doing for Toggl, our sister company. We helped Toggl hire 68 people, with more than 1,500 applicants per position.
Through effective skills testing – we were able to save 22 hours per candidate, on sourcing, screening and shortlisting.
We worked out these 22 work hours were the equivalent of $78,000 of resource spend!
Toggl Hire solves one of the biggest problems in hiring – screening. Don’t wats precious time screening hundreds of candidate resumes. Instead, use skills testing to put your candidates to the test and automatically filter the top performers to take forward.
If you’d like to optimize your hiring process and save time and money, give Toggl Hire a try. We guarantee to help you reduce the cost of hiring an employee by automating the sourcing and providing you with top-tier talent!
May 22, 2018
The average cost of hiring an employee is around $4,000, according to a Glassdoor study. However, various factors could impact that number, such as the size and location of your business, the role you're hiring for, and the industry in which you operate.
It is estimated that to replace a salaried employee it can cost, on average, between 6-9 months' salary. This covers recruitment costs, training expenses relating to the new employee, and salary. For high-turnover, low-paying jobs, expect to pay around 16% of the employees salary to replace them.
A Comprehensive Guide. A good rule of thumb is to put 40%-80% of your business revenue toward employee salaries.
Cost-per-hire is linked to recruiting talent and refers to the total cost of bringing the new employee to the company, including the expense of recruitment process, equipment, travel costs, administrative costs and benefits.
Another study by the Society for Human Resource Management states that the average cost to hire an employee is $4,129, with around 42 days to fill a position. According to Glassdoor, the average company in the United States spends about $4,000 to hire a new employee, taking up to 52 days to fill a position.
An employer needs to not only consider an employee's base salary and benefits, but also the payroll taxes they have to pay, any equipment that the employee needs to perform their job, any expensive training materials the employee needs, and the loss of productivity while the employee is learning or being trained.
While there's no one-size-fits-all solution to calculating total employee cost, the formula most commonly used (and a safe estimate if you're trying to budget for a new employee) is that the average total cost for an employee is between 1.25 and 1.4 times the employee's base salary.
Recruiting new employees is not cheap. According to new benchmarking data from the Society for Human Resource Management (SHRM), the average cost per hire was nearly $4,700.
Side effects of turnover, such as decreased productivity, knowledge loss, and lowered morale, can incur incidental costs, as well. Employee turnover is so expensive because organizations pay direct exit costs when an employee leaves and incur additional costs to recruit and train new hires.
Calculate an employee's labor cost per hour by adding their gross wages to the total cost of related expenses (including annual payroll taxes and annual overhead), then dividing by the number of hours the employee works each year. This will help determine how much an employee costs their employer per hour.
How much should you ask for? The average pay raise is 3%. A good pay raise ranges from 4.5% to 5%, and anything more than that is considered exceptional. Depending on the reasons you cite for a pay raise and the length of time that has passed since your last raise, you could request a raise in the 10% to 20% range.
Choose a salary range.
Rather than offering a set number of the salary you expect, provide the employer with a range in which you'd like your salary to fall. Try to keep your range tight rather than very wide. For example, if you want to make $75,000 a year, a good range to offer would be $73,000 to $80,000.
Even hiring a new employee in a services-related industry typically costs more than $1,000. There are many individual costs incurred during the hiring process, including advertising costs, in-house recruiters' salaries, third-party recruiter fees, travel expenses, sign-on bonuses, and employee referral bonuses.
More examples of external cost
Drinking alcohol and then driving places other road users at risk of an accident. Smoking in an enclosed space causes passive smoking health risks to others in the room. Building a new road causes a cost to the lost environment and increase in pollution for those living nearby.
- Choose quality over quantity of candidates.
- Reduce spending on job boards by 88%
- Use social media to attract candidates.
- Choose automation over external recruiting agencies.
- Schedule online interviews.
- Encourage employee referral.
- Maintain a talent pool.
This is also called cost-per-hire. I include this one-time cost in my total employee cost calculation as a function of budget.
The labor burden lets the employer know employee costs beyond the actual wage. An employer can pay an average of 40% of the standard hourly wage. For some contractors, this cost can shoot up to 70%.
By design, a single full-time employee costs more than a single part-time employee. Even if you do not offer the full-time employee benefits (which many companies are required to do by law, further increasing the costs), 40 hours a week costs more than 20 hours a week.
Employers often need to increase pay to hire experienced or in-demand workers when the need for workers outstrips the supply of available talent. At the same time, raises for current staffers may not have kept up. The disparity can also happen when companies use out-of-date data to set pay.
Higher labor costs reduce employment and/or the hours worked by individual employees. Laws that raise labor costs can either increase total employment or increase hours per worker, but they cannot do both.
We aren't talking a few extra dollars here. Unhappy workers cost the U.S. between $450 and $550 billion in lost productivity each year, according to a 2013 report on the state of the U.S. workplace conducted by research and polling company Gallup.
Does it cost more to hire a new employee or keep and train an existing employee explain your answer? ›
Training employees costs less than hiring new workers.
Hiring new employees can be costly—more than $4,000 per new hire, according to the Society of Human Resource Management. Training an employee, on the other hand, costs U.S. companies an average of $1,111 per year, according to the 2020 Industry Training Report.
The Theory of True Cost Economics
An example is the cost which taxpayers and government health care facilities pay for taking care of drug consumers (drug addicts). The companies which create such drugs are not required to pay for the damages dealt, and so the societal cost is not implemented into the market price.
You can determine what's a good labor to sales ratio and whether or not to decrease labor costs to get there. Labor cost should be around 20 to 35% of gross sales.
True cost economics is most often applied to the production of commodities and represents the difference between the market price of a commodity and total societal cost of that commodity, such as how it may negatively affect the environment or public health (negative externalities).
Research salary databases online
And so far in 2022, job-seekers expect to make 34% more than their current salary in a new gig, or a pay bump of $9,253 on average. Of course, the increase you can expect will depend on your job, experience, geography and industry, among other factors.
What is this? In the US, an annual salary between $70,000 – $78,000 before tax ($5,800 – $6,500 monthly) is considered to be a good wage in any state.
Here are the highest paying jobs of 2022:
Anesthesiologist: $208,000. Surgeon: $208,000. Obstetrician and Gynecologist: $208,000. Orthodontist: $208,000.
She suggests talking to people you may know who work at the company, used to work there, or people who know others who have worked at the firm. "Know in advance your desired salary range and try to be realistic based on your research."
Employers want to know salary expectations because they have a budget to stick to. They want to be certain your salary expectations align with the amount they've allotted for a specific role. If most applicants expect a certain range in terms of compensation, the company may provide more budget.
There are four main types of externalities – positive consumption externalities, positive production externalities, negative consumption externalities, or negative production externalities. Externalities create a social cost where goods are undersupplied or create damage to the environment.
"True cost" is the difference between the market price of a commodity and the comprehensive cost of that commodity to society. The term is normally used to draw attention to missing or hidden costs that are not found in the market price, even though it could theoretically apply to hidden benefits as well.
The private cost is any cost that a person or firm pays in order to buy or produce goods and services. This includes the cost of labour, material, machinery and anything else that the person of firm pays for.
Your dwelling limit must be at least 80% of your home's rebuild value to be fully covered. Home replacement cost can be calculated by multiplying your area's average per-foot rebuilding cost by your home's square footage. Replacement cost is not the same as market value.
What Is the Average Cost of Onboarding a New Employee? It's impossible to concretely state the average onboarding cost for a new hire, but a study from SHRM estimated the average cost of employee onboarding is around $4,100 per new hire.
The 80% rule means that an insurer will only fully cover the cost of damage to a house if the owner has purchased insurance coverage equal to at least 80% of the house's total replacement value.
Suppose a company bought machinery for $ 2,500 ten years ago. The company has to decide whether it is good to replace the machinery and buy a new one or continue with the old one. The present value of the machinery is $1,000 after depreciation. Suppose the replacement cost for that machinery comes out to be $2,000.
An item's replacement value or replacement cost, a value often used by insurance companies, is loosely related to its fair market value, but other considerations apply.